Virtual Currencies Compliance

Virtual currencies are ideal means of engaging in commercial transactions online. Virtual currency transactions are instant, immune from chargeback risk, and have developed a reputation for protecting user information in a manner vastly superior to credit cards and bank transfers. In spite of these attributes, virtual currencies have been the subject of intense government scrutiny since they first started circulating circa 1996. Virtual currencies (as well as their central issuers) have also been the targets of commercial lawsuits, civil forfeiture actions, grand jury investigations and criminal prosecutions based on a wide variety of allegations, including money laundering, fraud, unlicensed money transmitting business claims and a host of other issues. While there is no disputing the benefits of virtual currencies, they come with great risk, and those who issue virtual currencies or operate as commercial exchangers must always be mindful of their intense compliance obligations.

Today, Bitcoin is the world’s most popular virtual currency, though it is by no means the first. Between the time of its birth and March of 2013, Bitcoin and all other virtual currencies existed in an area of the law where there was no law.

That is not to say that Bitcoin issuers and users were not subject to the money laundering provisions of federal law if they used Bitcoin for unlawful purposes, but up until March 2013, the United States government had not decided how to regulate Bitcoin transactions. Then, on March 18, the Financial Crimes Enforcement Network (FinCEN) of the Department of the Treasury issued its Guidance entitled, “Application of FinCEN’s Regulations to Persons Administering, Exchanging, or Using Virtual Currencies.” This was a watershed moment for the regulation of Bitcoin and other virtual currencies. In FinCEN’s Guidance, FinCEN does not mention Bitcoin by name, but does include a discussion of “De-Centralized Virtual Currencies” which explains as follows:

A final type of convertible virtual currency activity involves a de-centralized convertible virtual currency (1) that has no central repository and no single administrator, and (2) that persons may obtain by their own computing or manufacturing effort.

A person that creates units of this convertible virtual currency and uses it to purchase real or virtual goods and services is a user of the convertible virtual currency and not subject to regulation as a money transmitter. By contrast, a person that creates units of convertible virtual currency and sells those units to another person for real currency or its equivalent is engaged in transmission to another location and is a money transmitter. In addition, a person is an exchanger and a money transmitter if the person accepts such de-centralized convertible virtual currency from one person and transmits it to another person as part of the acceptance and transfer of currency, funds, or other value that substitutes for currency.

FinCEN’s March 2013 guidance has made the following point crystal clear: if an entity is in the business of exchanging Bitcoin for real currency or vice versa, or accepts Bitcoin from one person and transmits the real currency equivalent to another person, that entity is a money transmitter and will be regulated as such in the United States, and will be subject to the criminal provisions of 18 USC 1960 for failing to register with the federal government as a money transmitter or being licensed in any state that would require a money transmitting license.

FinCEN’s regulatory scheme for Bitcoin dealers is unquestionably applicable for dealers operating outside of the United States. Thus, even assuming that a Bitcoin exchanger does not have a physical nexus in the United States, so long as the exchanger services people located in the United States, the exchanger will be regulated as a money transmitter. As FinCEN explained on July 18, 2011, and as we blogged shortly thereafter, FinCEN’s rules make foreign-located businesses engaging in MSB activities within the U.S. subject to U.S. law. As a result, even foreign-based MSBs with no physical presence in the U.S. can be classified as an MSB and thus subject to the rigorous requirements of the BSA. However, foreign banks as well as foreign financial agencies that engage in activities, that if conducted in the U.S. would require them to be registered with the SEC or CFTC, are excluded from the definition of an MSB. As noted in the rule, “To permit foreign-located persons to engage in MSB activities within the United States and not subject such persons to the BSA would be unfair to MSBs physically located in the United States and would also undermine FinCEN~s efforts to protect the U.S. financial system from abuse.”

Fuerst Ittleman David & Joseph has represented a wide array of financial services providers in IRS-BSA audits, OFAC licensing issues, grand jury investigations, state investigations, criminal and civil litigation, and commercial transactions. Fuerst Ittleman David & Joseph’s anti-money laundering compliance team is head by Andrew S. Ittleman, Esq., who is a certified anti-money laundering specialist, a member of the National Money Transmitters Association and the National Association of Criminal Defense Lawyers.

If you or your company has a question related to its anti-money laundering compliance obligations, our anti-money laundering law firm can provide further information. Please contact Andrew S. Ittleman, Esq. at or 305-350-5690.